A few options provide opportunities for advisors to originate mortgages.

State and federal laws make it tough for financial advisors to obtain fees in the mortgage world. But several companies are getting around the rules, arranging for advisors to earn commissions of 25 to 125 basis points on mortgages they originate for clients.

A major catalyst, these companies say, is that they actually are hiring financial advisors either as employees or independent contractors. Either W-2 forms or 1099 forms, based on company policy and/or state law, are generated. The advisor is required to perform a series of specific duties. These arrangements, the companies say, satisfy the requirements of the Real Estate Settlement Procedures Act, which prohibit the acceptance of referral fees for mortgages. They also may eliminate the need for advisors to register as mortgage brokers in certain states.

Randy Verlin, a CFP licensee with MainStreet Financial Advisors in Kalamazoo, Mich., figures he earns an extra $1,000 monthly-some 5% of his total income-by originating mortgages for clients. He does it as a part-time employee of Nicholas & Co. Mortgage Planning Solutions in Ann Arbor, Mich. Verlin, who otherwise reaps income primarily as an asset manager, estimates he spends an average of three hours weekly on a mortgage and submits a weekly time log. He gets paid for a series of duties, which include completing a mortgage analysis data sheet for his client and faxing it to Nicholas & Co. Then he works with the mortgage brokerage's president, Gibran Nicholas, who often deals directly with Verlin's clients by phone or e-mail.

"If you're doing a good job as a financial planner, you're going to do a mortgage analysis anyway," Verlin said. "Previous to this arrangement, we would just farm out the mortgage business to different banks."

Nationally, financial advisors originate less than 1% of all mortgages, says David Peskin, CEO of Vertical Lend of Melville, N.Y., a mortgage banker that claims to have mortgage relationships with 2,000 financial advisors nationwide. He expects that figure to swell to 5% of mortgages over the next five years.

Other firms offering revenue sharing arrangements to financial advisors include National Advisers, a marketing company established by financial advisors that is now a subsidiary of Access National Mortgage in Reston, Va., and FinancialCircuit Inc., a technology and financial services company in Campbell, Calif., which issues mortgages through a subsidiary, Innovex Mortgage Inc.

Mortgage companies peddling services through financial advisors are not limiting their offerings to simple 30-year, fixed-rate mortgages. Some offer clients mortgages that confuse even the most highly trained lenders, including reverse mortgages, adjustable-rate mortgages and commercial loans.

Nicholas & Co. Mortgage Planning Solutions touts to advisors, "The Best and Most Conservative Mortgage Option Available Today." It is a mortgage that charges interest only for the first ten years, based on the one-month LIBOR (London Interbank Offered Rate), plus two percentage points. The adjustable-rate mortgage, which requires principal and interest payments in years 11 to 20, has no periodic interest rate or payment cap, according to Nicholas. It only has a lifetime interest rate cap, he says, of 12%. There is no prepayment penalty.

This mortgage is quite attractive, now that the fully indexed rate is about 3.25%. At that rate, an interest-only monthly payment on a $200,000 mortgage would run $542-less than half the $1,134 monthly for a 6%, 30-year, fixed-rate mortgage. The problem: If rates ever hit the 12% lifetime cap after the first ten years-and fixed-rate mortgage rates did in 1985, according to Federal Reserve data-a client's monthly payment could more than quadruple to $2,202.17.

"That (the mid-1980s) is the only time in the history of the United States where we experienced double-digit interest rates," Nicholas says, noting that the specific events that triggered them are unlikely to repeat themselves.

A spot-check could turn up no major complaints against any advisors operating in a mortgage revenue sharing arrangement. But then again, most regulators agree that nobody is likely to complain with rates as low as they are now. The tide easily could turn if, as many economists predict, rates rise.

"Maine consumers are not shy about speaking up," warns William N. Lund, director of that state's Office of Consumer Credit Regulation. Any financial advisor originating mortgages in Maine must register as a loan broker or credit services organization, he says. "There is no exception in our loan brokerage laws."

Catie Marshall, spokeswoman for the New York state banking department, says her department received just one complaint from a consumer asking whether a financial advisor originating mortgages needed a license. Her response: "If a financial advisor wants to receive a separate fee for obtaining a mortgage, he needs to be registered as a mortgage broker."

She acknowledges that an advisor can avoid registering by working as an independent contractor, receiving a 1099 form from a licensed mortgage banker or registered mortgage broker. "But if they do that, they can only work for one broker or banker and can't try to sell the loan in multiple places.

"Laws vary from state to state," she stresses. "What's legal in Oklahoma may not be legal in New Jersey."

"HUD (the U.S. Department of Housing and Urban Development) would be concerned with the service that's being provided and what the consumer is being charged for the service," says HUD spokesman Brian Sullivan. Sullivan also warns against "upcharging," or charging a borrower more than a service costs to provide. Example: If a client's credit report costs you $30, you can't charge a mortgage borrower $40. "The courts have disagreed on this point," Sullivan says, "but HUD's historical position has been that upcharging violates RESPA (the Real Estate Settlement Procedures Act)."

There also are state and federal laws that govern predatory lending. "It's illegal to do continuous refinancings that benefit only the lender and not the borrower, because costs go up and up," Marshall, of New York, says. Exactly how strict those laws are may depend on the entity for which the advisor is originating mortgages. If an advisor originates mortgages for a national bank, the rules may be different than if he or she affiliates with a state-chartered bank. "It's really up to the confusion level for a lot of people," she says.

Some advisors rebate mortgage fees they receive to clients as an added service. Plus, there are a variety of other relationships that financial advisors are forging with mortgage companies. Nicholas says that he also will rent desk space from financial advisors, at market rents.

Another option is a strict referral. Even if advisors don't obtain fees for the mortgage referral, they can retain management fees on assets clients might otherwise tap when they need money, says mortgage broker Nicholas. The relationship also prevents clients from getting a mortgage at a bank, which is likely to cross-sell a borrower investment and insurance services-stealing an advisor's business.

If a fee-only advisor refers clients to him, Nicholas adds, he might help sponsor a client appreciation event. One such event recently cost him $2,000. Besides abiding by state mortgage brokerage and lending laws, advisors also must consider state securities laws and ethics issues.

"Whatever type of arrangement they are in, in terms of the client, we would expect the certificant to adhere to a code of ethics," says Margaret Brock, director of the CFP Board's Professional Review Department. "They would have an obligation to disclose financial remuneration-a commission or fee."

Also, she warns, fee-only CFPs can not call themselves fee-only planners if they're making a commission on the sale of a mortgage loan. Whether a sponsorship of a client appreciation event could violate this rule, she says, depends entirely on the amount of money involved and the circumstances of a complaint.

Paul C. Bennett, consultant and former CEO of National Advisers, adds that an advisor had better discuss any revenue sharing mortgage relationship with his or her broker and disclose it as an outside business activity.

Verlin says that he has been originating mortgages for about one year and was about to embark on a client mailing seeking mortgage rates for his database. This way, he can contact appropriate clients for a mortgage analysis should rates drop. He also recently hired a part-time employee, who receives $100 per loan to handle the clerical work of closing. He says he splits that employee's fee with a title company.

Before hooking up with Nicholas & Co., Verlin had seen proposals from a few other companies seeking to establish a similar mortgage relationship. He was concerned that those arrangements, which did not provide him with as much mortgage time with a client, could be construed as a referral in violation the Real Estate Settlement Procedures Act and possibly state law.

Even with his current relationship, a few issues required tweaking. For one thing, he has done a mortgage analysis for some clients only to have them accept a lower rate at another bank or brokerage.

Now Verlin is careful to tell clients upfront that they're going to be able to find better interest rates somewhere. He suggests that they don't enter into his mortgage analysis unless they're also willing to let him be their mortgage planner. Another irritant: Some clients have referred friends directly to mortgage broker Nicholas, rather than to him. "We're brainstorming on that right now," he says.